A dogged pursuit: two longtime advocates for shoring up the foundation on which Fannie Mae and Freddie Mac were built have had a pretty lonely quest. Now they find their views have become mainstream.

Author:Schiavone, Louise L.
Position:SECONDARY MARKET - Richard Baker, Armando Falcon - Interview

IF YOU MET THEM IN SOME NEUTRAL PLACE, like a vacation spot, and you rarely read the business pages, you would never think Richard Baker and Armando Falcon had anything in common. Nowadays, though, if they did find themselves on, say, Paradise Island at the same time, they would have quite a lot to talk about. [??] Working on different tracks over several years, the Republican congressman from Louisiana and the federal regulator from San Antonio, Texas, investigated Fannie Mae and Freddie Mac and the adequacy of their government oversight. Their pursuits began to hit pay dirt in 2003 and 2004, with the discovery of accounting problems at both corporations. [??] Indeed, Baker, chairman of the Capital Markets Subcommittee of the House Financial Services Committee, and Falcon, outgoing director of the Office of Federal Housing Enterprise Oversight (OFHEO), are significant players in the current effort to overhaul the oversight rules for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The effort has the support of the George W. Bush White House, many in the housing industry and a growing number of Democrats as well. [??] It wasn't until the discovery of corporate wrongdoing at businesses like Enron, Tyco and WorldCom that most elected officials cared about the dry issues surrounding corporate governance. And the issue of GSE regulatory oversight, as arcane as many voters might find it, was never a big vote-getter. But Baker had a different view.

Before his political career, the Louisiana Republican was a home builder and developer. "I came out of a market at 20 percent interest rates and saw government inefficiencies making the problem worse," Baker recalls. "My last subdivision was a small-acreage development, 25 lots, each on two or three acres. Long-term rates had just started to spike. I still remember the fella complaining his rate had jumped over 9 percent!"

Baker says he arrived at the Financial Services Committee with no understanding of Fannie's and Freddie's market significance. He just wanted to know how they might be useful to the average first-time homebuyer. The more he learned about the GSE practice of buying mortgages for portfolio with all its attendant interest-rate and capital risks, the more he became concerned. He started to confer with a variety of financial regulators.

"I had written the FDIC [Federal Deposit Insurance Corporation] a few years ago about GSE securities held by banks for the capital purposes. I was concerned about concentrations, such as big stock holdings by pensions funds, just because [of] the presumption over the years that these stocks were viewed as no-risk investments," Baker noted. And indeed the stocks had performed exceptionally well for years.

The GSEs' charters give them certain privileges designed to make home-buying more affordable for low- and middle-income Americans. The privileges include a credit line with the Treasury, exemption from state and local taxes, and no securities registration requirements.

But until last fall, Baker's unpopular determination to seek tighter controls on these secondary market behemoths was considered everything from esoteric to bold to just plain crazy. Two of the savviest corporations in the nation, Fannie Mae and Freddie Mac had engaged an army of consultants and lobbyists. The mission was to hold on to the special GSE benefits, which-represent billions of dollars in saved business costs, as well as a large measure of operating independence.

Baker saw the ravages and the costs of the savings-and-loan (S & L) debacle; "We've been through a series of volatile concerns," he says. He was convinced that--armed with the presumption that the U.S. government would bail them out in a crisis--the temptation could be great for excessive risk-taking at the GSEs.

Friends of Fannie and Freddie suggested Baker was an alarmist and, worse, roiling the financial markets with a steady stream of questions about the publicly traded companies. "You learn to grow pretty deaf to those concerns," says Baker, his once-blond hair now considerably whiter than when he first arrived in Washington. "My staff gets up in the morning and says, 'Who's he gonna make mad today?'"

Banking analyst Bert Ely, president of Ely & Co. Inc., Alexandria, Virginia, has followed developments as closely as anyone. "Richard Baker has done a great job; he's played it very well," says Ely. "If it had not been for him, we wouldn't be where we are today."

Ely says that from early on, Baker conducted "endless hearings, going back five years ago where he was getting beaten up for a lonely mission. It reminded me of the early days of the S &amp...

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